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Brexit and the UK commercial property market

Real Estate Update

Earlier this year, David Cameron fired the starting gun on whether Britain should continue its membership of the EU.

As we all know, the potential effect of a Brexit is a topic which has divided the opinions not only of our politicians but those of our entire nation and beyond.

Whilst researching this article, in the hope of cutting through the sea of conflicting reports from political commentators, and establishing a clearer understanding of those divisions, I looked first to the words of our leaders. Surely that would bring some order to the debate?

First up is George Osborne who has likened a Brexit to a "long, costly and messy divorce". Boris Johnson on the other hand says that leaving the EU would be like a "prisoner escaping jail and a huge weight lifted from British business". David Cameron tells us that leaving the EU would "threaten our economic and national security" and that, despite being guarded on the issue, Teresa May agrees with him. Michael Gove on the other hand says a Brexit would be a positive step for the UK and that, despite having no political allegiances, the Queen agrees with him. The ensuing complaint from Buckingham Palace quickly reaffirmed that the Queen in fact remains "politically neutral". No luck there then.

Not sensing any immediate clarity on the issue, I looked to the words of our elder statesmen, from a generation whose experience and wisdom may have led them to some common ground:

Neil Kinnock, former leader of the Labour party (and former European Commissioner) hit the top of my Google search, with his conviction that the impact of a Brexit would be "seismic", and likened it to "a jump off the edge of the cliff... in which our economic stability is hugely put at risk". Iain Duncan Smith, on the other hand, tells us that, by remaining in the EU, we would be "sailing serilously close to the rocks". Is jumping off a cliff more dangerous than sailing close to the rocks? More to the point, does Teresa May’s opinion trump the Queen’s (if she has one)? The murky waters were not clearing.

The fact is that, in a sea of conflicting information and opinions, it is impossible to be sure what the impact of a Brexit would be on the UK as a whole, but what about the particular field in which we work? While the health of the UK commercial property market is clearly linked to the general health of our economy, it is easier to be specific as to potential pros and cons of a Brexit when it is applied to a specific sector.

The potential for a positive, or neutral, impact

Many believe that, as one of the most liquid and transparent markets in Europe, the UK would be likely to continue to attract substantial investment even if it left the EU. There are legitimate doubts as to whether a Brexit would have a negative impact on the international appetite for UK real estate and some go further by suggesting that any short term political uncertainty might in fact create buying opportunities, resulting in a boost for our property market. Access to the single market is not the only reason that firms invest in Britain.

Commercial property, particularly in London, is seen as a "safe haven" asset. It generally retains or increases its value and is protected by the stability and security of a liberal democracy. Foreign investors often invest in UK commercial property in order to escape debt crises or other economic problems in their own countries. A Brexit is unlikely to change that.

It is possible that a weaker sterling could attract more investment into the UK property market. The relative strength of the pound as against emerging currencies has in the past tended to make property investments less appealing to some foreign investors. A Brexit could reverse that situation. When sterling fell during the global financial downturn, many foreign investors turned to the UK and bought up property in prime central locations at relatively cheap prices.

A Brexit may enhance the UKs position in the world by releasing it from EU rules and regulations which include financial transaction taxes. This could result in an enhancement of London’s position as a global capital for financial services, leading to an increased flow of capital into the UK economy which has been key to the UK property market over the last decade.

Access to the single market has not been the main driver for investment, historically, which suggests that the impact of a Brexit would be negligible. Most foreign capital coming into the UK property market is for investment rather than operational purposes in any event.

Factors such as our legal system and language, as well as the size, liquidity and transparency of the British market are not a function of our European Union membership, and would remain major drivers for continuing investment.

The potential for a negative impact:

As things currently stand certain types of businesses (including banks and insurance companies) are permitted to operate across the EU provided that they have a base in the UK. This process, known as "passporting" means that a British bank can carry out its business elsewhere in the EU, from its UK base. The same applies to foreign banks, provided that they have a base in the UK. In the absence of any special arrangement to the contrary, passporting across the EU from a UK base would not be possible following a Brexit making the UK less attractive as a base for financial service organisations wishing to operate across the EU, and potentially forcing institutions to relocate to the continent. This could, amongst other things, put a dent in occupier demand, although there is a counter argument that even if demand from financial services firms was to fall, increased demand from other sectors could help to mitigate the overall impact on vacancy rates and rents.

It is possible that global organisations and companies could consider reducing their UK operations. Would a Brexit result in occupier nervousness, with a resulting reduction in take-up?

Changes to freedom of movement provisions could have an impact on the property industry. By way of example, a reduction in workers’ migration could have an effect on the cost of construction projects and the free movement of goods and services across the EU could have an effect on property owners, tenants and developers.

Whilst a reduction in the value of sterling, relative to other major currencies, could increase demand for property, it would at the same time have a negative impact on imports and reduce GDP . A reduction in GDP would in turn hurt rental growth.

Regardless of what "beneficial terms" the UK may negotiate as part of a Brexit, there would inevitably be a period of uncertainty in the short to medium term. History has shown that periods of uncertainty are rarely a good thing when it comes to investment, whether that be the stock exchange or the property market.

Research shows that, generally speaking, the commercial property sector does not want the UK to leave the EU. A recent survey undertaken by KPMG found that 66 per cent of real estate experts believed that "Britain leaving the EU would have a negative effect on inbound cross-border investment". Whilst this does not help us with the specifics of why this may be the case, it gives an insight into the sentiments of the industry, and 66 percent is a significant majority.

Summary

In summary, the effect of a Brexit on the UK commercial property market remains very much open to debate. There are numerous arguments for and against, not to mention a substantial body of opinion lying in between, representing those who feel the entire debate is a "nil sum game", that the significance of the vote lies in politics rather than economics, and that the UK economy will remain relatively unmoved whatever the outcome.

Whilst there are no hard and fast ways of predicting what will happen should an exit become a reality, Brexit is something we should all have an opinion on albeit that, ultimately, the decision will be made in the privacy of the ballot box on 23 June 2016.

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DLA Piper is a global law firm with lawyers located in more than 40 countries throughout the Americas, Europe, the Middle East, Africa and Asia Pacific, positioning us to help clients with their legal needs around the world.

DLA Piper is a global law firm with lawyers located in more than 40 countries throughout the Americas, Europe, the Middle East, Africa and Asia Pacific, positioning us to help clients with their legal needs around the world.